Mal Brough

Minister for Revenue and Assistant Treasurer

18 July 2004 - 26 January 2006

TAX TREATMENT OF CERTAIN DEBT/EQUITY HYBRID INSTRUMENTS

The Government will make new income tax regulations to clarify the tax
treatment of certain term subordinated notes under the debt/equity rules.

The regulations will ensure that 'solvency clauses' do not
preclude the notes from being debt for tax purposes. The solvency clauses
allow the issuer to defer payment if the payment would cause insolvency.
They are commonly found in Lower Tier 2 term subordinated notes issued by
Authorised Deposit-Taking Institutions (ADIs). However, the regulations will apply to all issuers.

The Government will also amend the income tax law to further extend the
debt/equity transitional provisions applying to Upper Tier 2 instruments.
The extension until 1 July 2007 will allow further time for consultation and
development of an Upper Tier 2 regulation that was previously announced by the Government.

The Upper Tier 2 regulation will apply to certain Upper Tier 2 and similar
instruments issued by banks and non-mutual building societies (which are ADIs)
or their subsidiaries. It will also apply to entities that have undertaken to
comply with the ADI capital adequacy requirements issued by the Australian
Prudential Regulatory Authority (APRA).

The final form of the regulations will be developed in consultation with
key stakeholders.